Barclays: Staley needs numbers to match the message

Deutsche Bank’s John Cryan might have the toughest job in banking, but Jes Staley probably runs a close second. The Barclays CEO has had an impressive first six months, all things considered. As always, there is more to do.

First off:
what he’s done. He has
hired his own senior management team, mostly from his old
shop of JPMorgan. They come with good credentials and are
respected in the market. And it makes sense for him to surround
himself with familiar and trusted faces. So what if it adds to
the 'recreating JP without that pesky Jamie’
narrative? There are worse ideas than that.

He has put his own mark on the reshaping work that was
already underway, adding some £8 billion of risk-weighted
assets to the scope of the bank’s non-core
division (but without using that as an excuse to tinker with
the wind-down timeframe), taking the bold
decision to sell down Africa (a heritage operation for
Barclays), and closing sub-scale country operations within the
investment bank.

He has said many of the right things to shareholders and
analysts, who have generally been appreciative.
That’s lucky for him, as they have also had to be
tolerant.
Staley is not exactly reversing his predecessor Antony
Jenkins’ intention to rein in the investment
bank, but there is no doubt that it will be a more important
part of the package under his tenure. Yes, running down the
non-core division ought to restore group returns to double
digits, but halving the dividend for two years to help finance
that plan is a lot to ask investors to swallow.

He has said the right things to staff, too. His denigrators
have occasionally questioned his capacity to manage a firm of
the complexity of Barclays. But those working closest to
him are supportive. There is a palpable relief in the
investment bank that they are working with someone who gets it:
he will need to be careful that this does not lead to
alienation elsewhere.

His biggest achievement so far, however, is to have changed
the tone of the conversation around Barclays. No longer is it
dominated by talk of a scandal-plagued also-ran that has lost
its way. The investment bank aside, it has strong core
businesses in the UK and in credit cards as a foundation. That
message is getting across.

Stuck stock

But the stock stays stuck. Along with much of the industry,
Barclays trades well below book value. Staley
can’t singlehandedly re-rate the sector, but to
move the needle on his own firm’s equity there are
several jobs still to be done.

But in tandem with that, he needs to maintain – or
improve – the returns in his core businesses. Cutting
loose from the drag of non-core won’t be much help
if returns in core have sunk in the meantime. And
there’s no wiggle room: core is generating a
return on tangible equity of almost exactly 10% right now. If
conditions or performance worsen anywhere without a
compensating improvement elsewhere, that double-digit target is
at risk.

In the current environment, it might seem counter-intuitive
to say that the best opportunity for lifting returns is in
Barclays’ investment bank. But it probably is. The
division’s ROTE in the first quarter was just
7.3%. But the bank is already bucking a trend: it has raised
its share of investment banking fees in EMEA, putting it in
fourth place. In cash terms, its fees are only down by 5%,
while all the other top 10 firms are down by anything from 15%
to 44%. The overall pool for the top 10 has plummeted almost
30%.

In part Barclays has done this by being savvy about how to
get a foot in the door as it looks to prove its credentials in
businesses where it has little reputation, like equity and
M&A. Already it can show a track record of how pieces of
niche business for big names have led to big mandates down the
track. Staley must ensure that it can keep doing this.

Staley needs to reach agreement with the UK regulators on
Barclays’ ring-fencing plan. Like his predecessor,
he is not finding this an easy task. If he can’t
get the Prudential Regulation Authority to agree to a
mother/daughter structure, he at least needs to make sure the
non-UK bank is not a capital orphan.

Finally, he needs to convince shareholders once and for all
that they should move beyond questions of culture and conduct.
That means continuing to explain in concrete terms what he is
doing to make such matters a thing of the past. He has made
restoring professionalism to banking a mission. A fresh conduct
issue on his watch would be unforgivable – and quite
possibly unsurvivable.

So far Staley has nailed the messaging – internally
and externally. Now he needs to match all of his core
businesses to that message.

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